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In recent years we have often discussed the evolving labor shortages in the US economy. When we look beyond the US, it is clear that there are areas where labor shortages are a much bigger issue. In this blog, we focus on Central and Eastern Europe (CEE), the region with perhaps the most severe shortage of labor in the world.

For this analysis, we have divided Europe into the following three regions. Central and Eastern Europe (CEE) consists of Bulgaria, Croatia, Czechia, Estonia, Hungary, Lithuania, Latvia, Poland, Romania, Slovenia, and Slovakia. Northern and Western Europe (NWE) consists of Austria, Belgium, Denmark, Finland, France, Germany, Ireland, the Netherlands, Norway, the UK, and Sweden. Southern Europe (South) consists of Greece, Italy, Portugal, and Spain. For the labor market indicators shown in this blog, the regions are weighted according to each country’s share in real GDP. Due to limited availability of data, some countries are excluded from the regional averages in some charts.

Labor shortages in CEE are of great importance for a couple of reasons. First, with 64 million people aged 15 to 64, CEE makes up 21 percent of the working-age population in the European Union. Second, after their accession to the European Union, CEE countries have become, with their lower labor costs, very integrated into Northern, Southern, and Western European value chains. Labor market tightness and rising labor costs will therefore have important spill-over effects to other European countries.

There are several indicators illustrating the severe tightness in CEE. At 4.3 percent, the CEE unemployment rate has reached the lowest point in its EU history (Chart 1). Compared to Northern and Western Europe (NWE), labor markets in CEE were hit harder by the Great Recession and the Euro Area crisis. After the Euro Area crisis, however, the labor market tightened faster in CEE and, by late 2016, the CEE unemployment rate dipped below the unemployment rate in NWE.

In addition, the broadest measure of unemployment[1], also known as U6, is well below its pre-recession rate. Another measure of labor market tightness pointing at historically tight labor markets comes from the European Commission’s Business and Consumer Surveys. Its question on labor shortages shows that over 40 percent of businesses operating in the CEE manufacturing industry perceive labor as limiting their production (Chart 2). This is more than double compared to NWE. In the services sector, on the other hand, NWE and CEE experience comparable acceleration in labor market tightness (Chart 3). But consistently more NWE businesses report that labor is limiting their output of services. As with the unemployment rates, in Southern Europe (South) there still seems to be slack in the labor market.

Chart 2: Percent of companies with labor limiting production in the manufacturing industry, 2000 to 2018Q3.

Note: Latvia, Croatia, Denmark, Ireland, and Norway are excluded from the regional averages due to limited availability of data.

Source: European Commission Business and Consumer Surveys---quarterly question on factors limiting production in the manufacturing sector, calculations by The Conference Board.

Chart 3: Percent of companies with labor limiting the business in the service sector, 2007 to 2018Q3.

Note: Croatia, Denmark, Ireland, Norway, and Spain are excluded from the regional averages due to limited availability of data.

Source: European Commission Business and Consumer Surveys---quarterly question on factors limiting the business in the service sector, calculations by The Conference Board.

Despite tightening labor markets in many countries, labor costs have been slow to accelerate. In the US there have recently been more signs of wage acceleration, both on a national level and especially for blue-collar and low-pay services workers (for the full report click here; for a blog click here). In NWE, wage growth is still tepid despite an especially tight labor market in Germany. On the other hand, in CEE, wage acceleration is very visible. Chart 4 shows that wages have consistently accelerated and exceeded 10 percent growth by the end of 2018. Hungary and Romania have shown the strongest increases over the past four quarters, but strong wage acceleration is documented across all CEE countries.

Chart 4: Eurostat Labor Cost Index (wages and salaries) in the business sector, percentage change from the same quarter in the preceding year, 2002 to 2018Q3, 4-quarter moving average.

Note: Croatia is excluded from the CEE regional average due to limited availability of data.

Source: Eurostat, calculations by The Conference Board.

This acceleration is especially impressive after adjusting for inflation (Chart 5). Consumer inflation in CEE does not exceed 2.5 percent and is not very different than the rest of the continent. As a result, real wage growth (nominal wage growth after adjusting for inflation) is now the highest since the measure was first recorded. Workers are taking home large real wage gains.

Chart 5: Central and Eastern Europe --- Eurostat Labor Cost Index (wages and salaries) in the business sector, the Harmonized Index of Consumer Prices---all items, and its difference or real wage growth, percentage change from the same quarter in the preceding year, 2002 to 2018Q3, 4-quarter moving average.

Note: Croatia is excluded from the CEE regional average due to limited availability of data.

Source: Eurostat, calculations by The Conference Board.

With hiring being difficult and wages rapidly rising, CEE seems to be experiencing severe labor market tightness. Businesses operating in this part of Europe should be aware if they weren’t already. In a following blog, we will discuss why the labor market has become so tight in CEE and what can be expected in the next 5 years and the longer term.

[1] U6, the broadest measure of unemployment, includes not only the unemployed but also involuntarily part-time workers, as well as those who have not looked for work in the last four weeks but who are willing to work.

About the Author: Frank Steemers

Frank Steemers is an Associate Economist at The Conference Board and mainly involved in the analysis of the United States labor market. Based in New York he conducts statistical and descriptive analys…

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